Newscast Media WASHINGTON—The Securities and Exchange Commission today announced an award of more than $14 million to a whistleblower whose information led to an SEC enforcement action that recovered substantial investor funds. Payments to whistleblowers are made from a separate fund previously established by the Dodd-Frank Act and do not come from the agency’s annual appropriations or reduce amounts paid to harmed investors.
The award is the largest made by the SEC’s whistleblower program to date.
The SEC’s Office of the Whistleblower was established in 2011 as authorized by the Dodd-Frank Act. The whistleblower program rewards high-quality original information that results in an SEC enforcement action with sanctions exceeding $1 million, and awards can range from 10 percent to 30 percent of the money collected in a case.
“Our whistleblower program already has had a big impact on our investigations by providing us with high quality, meaningful tips,” said SEC Chair Mary Jo White. “We hope an award like this encourages more individuals with information to come forward.”
The whistleblower, who does not wish to be identified, provided original information and assistance that allowed the SEC to investigate an enforcement matter more quickly than otherwise would have been possible. Less than six months after receiving the whistleblower’s tip, the SEC was able to bring an enforcement action against the perpetrators and secure investor funds.
By law, the SEC must protect the confidentiality of whistleblowers and cannot disclose any information that might directly or indirectly reveal a whistleblower’s identity.
Categories: News Tags: asset backed securities, collateralized debt obligations, credit default swaps, mortgage backed securities, mortgage fraud, mortgage modification, SEC, securities and exchange commission
Newscast Media WASHINGTON, D.C. —The Securities and Exchange Commission today announced that it charged Franklin Bank Corp.’s former chief executives for their involvement in a fraudulent scheme designed to conceal the deterioration of the bank’s loan portfolio and inflate its reported earnings during the financial crisis. The SEC alleges that former Franklin CEO Anthony J. Nocella and CFO J. Russell McCann used aggressive loan modification programs during the third and fourth quarters of 2007 to hide the true amount of Franklin’s non-performing loans and artificially boost its net income and earnings. The Houston-based bank holding company declared bankruptcy in 2008.
“Nocella and McCann used the loan modification scheme like a magic wand to change non-performing loans into performing assets,” said Robert Khuzami, Director of the SEC’s Division of Enforcement. “Their disclosure and accounting tricks misled investors into believing that Franklin was outperforming other banks during the height of the financial crisis.”
What the SEC means is that these banks sold “toxic assets” to investors in form of Mortgage-Backed Securities (MBS) that were pooled together into Trusts. The banks were first compensated through TARP (Troubled Assets Relief Program) money using billions of taxpayers’ money. They were also compensated a second time through insurance (credit default swaps), and the third compensation came through the stream of monthly payments by homeowners. The fourth compensation came when banks were unable to modify loans, and sold the homes at public auctions through foreclosure.
So these banks have earned money four-fold, and are not being held accountable. It seems the magic word is to add the word “bank” in a business name and one is virtually immune from being charged with illegal business practices. However, the SEC is slowly changing that, yet whether the courts will be willing to hold the banks accountable remains to be seen.
The SEC’s complaint filed in U.S. District Court for the Southern District of Texas seeks financial penalties, officer-and-director bars, and permanent injunctive relief against Nocella and McCann to enjoin them from future violations of the federal securities laws.
The SEC has a strong case under Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5]
15 USC § 78j(b) – Manipulative and deceptive devices states:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), any manipulative or deceptive device or contrivance in
contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
17 C.F.R. § 240.10b-5 states:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.
The securities banks deal with are Mortgage-Backed Securities (MBS). A company that engages in the business of investing, reinvesting, owning, holding, or trading in securities should abide by the Investment Company Act of 1940 also referred to as (15 USC § 80a–3) that requires any such business to be registered in order to conduct business.
Almost 100 percent of these banks that claim to be Trustees for XYZ Trust are operating illegally because the Trusts are defunct and do not exist. Unfortunately judges and attorneys seem to be unfamiliar or unwilling to learn about the securitization process, so one has to school them using charts, tables or
diagrams. The SEC is doing just that, and we should expect more diagrams to be provided at trial.
When fighting such cases involving banks claiming to be Trustees, acting on behalf of some Trust, one has to be willing to fight them all the way to the Supreme Court, since those justices are more knowledgeable in dealing with such complex laws.
For more information about this enforcement action, contact:
Regional Director, SEC’s Fort Worth Regional Office
Associate Regional Director, SEC’s Fort Worth Regional Office